Effects of Transfer Pricing in developing countries: Cases in Africa

Transcription

1 ACCOUNTANTS ANNUAL CONFERENCE 2016 Effects of Transfer Pricing in developing countries: Cases in Africa APC- Bunju 3 rd December, 2016 CPA Ahmad Mohamed (MARLA, ADA, Dip-Edu)

2 Disclaimer This presentation is for the sake of disseminating information and knowledge. It has nothing to do with what TRA/NBAA is doing. In case of conflicting information on facts then the laws (Principal Acts), Regulations, guidelines and official interpretation from TRA/NBAA prevails. Thank you

3 Agenda Introduction TP methods Application of TP in the world TP and Developing countries African involvement in TP TP and EAC Challenges facing TP Conclusion

4 Introduction Tax compliance is increasingly taking up a central position in business management. Today, tax has been perceived as one of the key risks in business. We have seen management dedicating more time to tax compliance, or worse, the impact of noncompliance through effective/efficient tax planning. Government/Tax authorities around the world are becoming more assertive as they seek to improve compliance and increase revenue collection. Governments enacts various tax laws/ regulations to facilitate the collection of taxes and enhance compliance with tax laws

5 What is TP Fact about its evolution Technological expansion Access to information and communication network led to virtual office far from the business center Increased MNE s trade flow (intra-group transactions) Movement of goods and services, multi-tired services, capital, intangible like Intellectual Property etc

6 What is TP Price is normally a market-driven. Since the MNE are likely to be associates, The structure of transactions within an MNE group is thus determined by a combination of the market and group driven forces common interests of the entities of a group differ from the open market conditions Thus, a large and growing number of international transactions are no longer governed entirely by market forces

7 it becomes important to establish the right price, called the transfer price, for intra group, cross border transfer of goods, intangibles and services Transfer pricing is the general term for the pricing of cross border, intra firm transactions between related parties.

8 Transfer pricing It is a phenomenon attached to transfers of goods and services, capital (such as money) and intangibles (such as intellectual property) within an MNE group; such transfers are called intra-group transactions A charge reported by an entity from the goods/services received from associate is what is termed as transfer price

9 Basic issues underlying TP Jurisdictional issues taxing rights. Which country has the power to tax Allocation issues where does cost incurred or revenue generated Resource and benefit allocation Valuation issues the right price. What exactly shall be charged as the transfer price Valuation of intra-firms transfer

10 Legal provisions for TP Smooth operation of TP issues reflects provision of: OECD Model Convention The UN Model Convention Country s Domestic Tax Laws Specific TP regulations/guidelines Relevant Treaties In all cases, advocacy is on Arm s Length Principles

11 TP and Arms Length Principle Comparability analysis Characteristic of transaction (property or services) Functional analysis Contractual terms Marketing conditions Business strategies Transactional analysis (actual transaction is considered) Evaluation of separate and combined transactions

12 Use of an arm's length range range of acceptable/comparable prices Use of multiple year data Losses Intentional set offs Use of customs valuations Use of transfer pricing methods

13 Transfer price method Transaction based Comparable Uncontrolled Price (CUP): The CUP Method compares the price charged for a property or service transferred in a controlled transaction to the price charged for a comparable property or service transferred in a comparable uncontrolled transaction in comparable circumstances.

14 Transfer price method Transaction based Resale Price Method (RPM) The Resale Price Method is used to determine the price to be paid by a reseller for a product purchased from an associated enterprise and resold to an independent enterprise. The purchase price is set so that the margin earned by the reseller is sufficient to allow it to cover its selling and operating expenses and make an appropriate profit.

15 Cost Plus (C+ or CP) The Cost Plus Method is used to determine the appropriate price to be charged by a supplier of property or services to a related purchaser. The price is determined by adding to costs incurred by the supplier an appropriate gross margin so that the supplier will make an appropriate profit in the light of market conditions and functions performed.

16 Profit-based methods Two classes of transactional profit methods are recognized. These may be categorized as profit-comparison methods (Transactional Net Margin Method or TNMM/Comparable Profits Method or CPM) and profit-split methods.

17 Profit comparison methods (TNMM/CPM) These methods seek to determine the level of profits that would have resulted from controlled transactions by reference to the return realized by the comparable independent enterprise. The TNMM determines the net profit margin relative to an appropriate base realized from the controlled transactions by reference to the net profit margin relative to the same appropriate base realized from uncontrolled transactions. Profit-split methods Profit-split methods take the combined profits earned by two related parties from one or a series of transactions and then divide those profits using an economically valid defined basis that aims at replicating the division of profits that would have been anticipated in an agreement made at arm s length. Arm s length pricing is therefore derived for both parties by working back from profit to price.

18 TP- Application Primarily, countries aims at securing the tax base Thus, TP is applicable either in international transaction (cross border TP) or within a country (Domestic TP) Cross border TP is for gaining the benefit of tax heaven or holiday Domestic TP is for taking advantages of tax incentives and losses

19 TP and developing countries Recently, Developing countries experience major Integration with the global economy more capital flows to developing countries (DCs) more intra group transactions Increase risk of losing revenue owing to multinational enterprises (MNEs) transfer pricing (TP) and other schemes internal TP with an entity enjoying tax holidays Many DCs adopted TP rules

20 TP and developing countries When adopting TP rules, Developing Countries need to; avoid economic double taxation Set TP rules in line with internationally agreed principles Review tax regimes Streamline tax incentives

21 TP and Africa Cases Majority African countries have adopted TP in their tax regimes Each nation s TP regime has unique aspects and rules that should be considered when conducting business in that jurisdiction Some have special TP regulations like Angola, DRC, Tanzania, Nigeria, South Africa Kenya Malawi and Uganda Others have TP rules within Tax Laws. These include Ghana, Mozambique Tunisia etc

22 African Countries with TP Country TP reg TAX Losses Thin cap Algeria YES 4 years NO Angola YES 3 years NO Benin YES 3 years NO Botswana NO 5 years NO Burkina Faso YES 4 years YES (2:1) Burundi YES 5 years NO Cameroon YES 4 years YES (1.5:1) Cape Verde NO 3 years NO Central Africa YES 3 years NO Chad YES 3 years NO Comoro YES 3 years NO

23 African Countries with TP Country TP reg TAX Losses Thin cap CONGO (REPUBLIC) YES 3 years NO CONGO (DRC) YES 5 years NO DJIBOUT YES 3 years NO EGYPT YES 5 years YES (4:1) EQUATORIAL GUINEA NO 3 years NO ERITREA NO 5 years NO ETHIOPIA YES 5 years YES (4:1) GABON YES 5 years YES (1:2) GAMBIA YES 6 years NO GHANA YES 5 years (Special ind. YES (2:1) GUINEA YES 3 years YES (1.5:1)

24 African Countries with TP Country TP reg TAX Losses Thin cap GUINEA BISSAU YES 3 years NO IVORY COAST YES 5 years NO KENYA YES 4 years YES (3:1) LESOTHO YES INDEFINITELY YES (3:1) LIBERIA YES 5 years NO LIBYA NO 5 years NO MADAGASCAR YES 5 years YES (2:1) MALAWI YES 6 years NO (3:1 to be challenged) MALI NO 3 years NO MAURITANIA YES 5 years NO

25 African Countries with TP Country TP reg TAX Losses Thin cap MAURITIUS YES 5 years NO MOROCCO YES 4 years NO MOZAMBIQUE YES 5 years YES (3:1) NAMIBIA YES INDEFINITELY YES (2:1) NIGER YES 3 years NO NIGERIA YES INDEFINITELY 4 years for new b nes RWANDA YES 5 years YES (4:1) SAO TOME YES 5 years YES (2:1) SENEGAL YES 3 years NO SYCHELLES YES 5 years NO NO

26 African Countries with TP Country TP reg TAX Losses Thin cap SIERRA LEONE YES No Compensation NO SOUTH AFRICA YES INDEFINITELY YES (3:1) SOUTH SUDAN YES 5 years NO SUDAN NO 5 years NO SWAZILAND NO INDEFINITELY NO TANZANIA YES INDEFINITELY YES (7:3) TOGO YES 3 years YES (1:2) TUNISIA YES 5 years NO UGANDA YES INDEFINITELY YES (1.5: 1) ZAMBIA YES 5 years YES (3:1) ZIMBWABWE NO 6 years YES (3:1)

27 EAC and TP Tanzania Transfer pricing The Income Tax Transfer Pricing regulations, 2014 came into effect in February Entities entering into transactions or series of controlled transactions are now required to determine the income and expenditure resulting from such transactions, in accordance with the Arm s Length Principle (ALP). The regulations are applicable to domestic controlled transactions as well as those involved in cross border transactions. Mandated the Commissioner to effect necessary adjustments so as to ensure adherence with the ALP, which may be to the detriment of the taxpayer. The regulations further provides that, in the event of inconsistency between OECD principals or the United Nations transfer pricing guidelines, and the Income Tax Act, then the Income Tax Act takes precedence.

28 Uganda Transfer pricing regulations came into effect on 1 July The Arm s Length Principle (ALP) It applies to transactions between associated taxpayers or between taxpayers who are in an employment relationship. Mandated the Commissioner to effect necessary adjustments so as to ensure adherence with the ALP, which may be to the detriment of the taxpayer. Any taxpayer who asserts formally the application of arm s length pricing in his transactions with related party transactions is required to record, in writing, sufficient information and an analysis to justify that the controlled transactions are consistent with the ALP.

29 Kenya The Income Tax Act also provides for the substitution of arm s length prices where the profits of a residents business are reduced, i.e. transferred as a result of or by virtue of business having transacted with a non-resident with whom the resident is related. A person will be regarded as related to another if either person participates directly or indirectly in the management, control or capital of the business of the other or if a third person participates directly or indirectly in the management, control or capital of the business of both. Thin capitalization rules are applied when the debt/equity ratio exceeds 3:1. Under the Finance Act 2014 the debt/equity ratio for Petroleum Contractors and Mining Licensees has been set at 2:1 from 1 January In calculating thin capitalization, negative reserves are taken into account with effect from 13 June 2008.

30 Burundi There are no specific transfer pricing rules yet The Burundian Income Tax Law provides guidance on transfer pricing. Transactions should take place at arm s length. Interest expenses paid to related entities are non-deductible for tax purposes if the debt-to-equity ratio exceeds 30%. This excludes reserves and retained earnings.

31 Rwanda There are No specific rules for transfer pricing but the income tax law provides guidance on transfer pricing. Transactions should take place at arm s length. Interest expenses paid to related entities are non-deductible for tax purposes if the debt-to-equity ratio exceeds 4:1. This excludes reserves and retained earnings.

32 FUN but not FUNNY When TP is a concern to all partner states; No treaty among the EAC partner states to cater for exchange of information or common regulations regarding tax affairs. Each partner state have its own set of tax laws and regulation

33 WHY is TP a Hot Issue Transfer pricing affects the amounts paid as corporate tax (Base erosion and profit shifting) Transfer pricing affects cash flow, investment decisions and performance indicators Transfer pricing affects taxes on international trade (customs value) May trigger double taxation or non-taxation Transfer pricing can help an organization to identify opportunities for business optimization Documentation requirement facilitate compliance

34 Checklists for Effective implementation-tp TP regulations TP methods Arm s Length Principles Documents requirements TP in domestic laws: Thin capitalization rule Safe Harbours rule Advanced Pricing Agreement Dispute resolution mechanism Time limitation Domestic TP rules CFC rules

35 Challenges facing TP TP adjustment Not a straight forward Little/no expertise on transfer pricing Lack of comparable; Scarce publicly available data on comparable Complexity of laws; Increasing intangible economy lack of proper internal review mechanism lack of workable dispute resolution mechanism Location savings (set business where cost is low)

36 How to improve TP A lot can be made to improve TP application such as: Workshops/Conferences for taxpayers Technical assistance Training courses (medium term, sustainable) Tailored country advice (OECD, ATAF, WB) Enhance Staff competence (Multi skilled, hybrid team) Database management Treaties on Exchange of information

37 Conclusion Increasing globalization, sophisticated communication systems and information technology allow an international enterprise to control the operations of its various subsidiaries from one or two locations worldwide Trade between associated enterprises is often in intangible items, such as services and software Several issues arise when applying the arm's length principle

38 Conclusion Furthermore, it is widely accepted that transfer pricing is not an exact science and that the application of transfer pricing methods requires the application of information, skill and judgment by both taxpayers and tax authorities.

39 Conclusion Transfer pricing is generally considered the major international taxation issue faced by MNEs today. It is an enormously important issue for many countries, developing and developed. Even though responses to it will in some respects vary, transfer pricing is a complex and constantly evolving area and no government or MNE can afford to ignore it.

40 Thank you for your Attention